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Real Estate Investments: What You Need to Know

 By Katelyn Mayer, PA & MD REALTOR®

Investing in real estate can be a powerful way to build wealth, but like any investment, it comes with its own set of advantages, risks, and strategies. Here’s a straightforward guide to help you understand the basics of real estate investing.

Advantages of Investing in Real Estate

  • Leverage: Real estate allows you to control 100% of a property’s value with only 20-30% down by using financing (bank or private lenders). This means you can amplify your returns.

  • Tangible Asset: Unlike stocks or bonds, you can physically see and touch your investment — the bricks and mortar.

  • Versatility: There are many ways to invest, from rental properties to partnerships, corporations, and real estate investment trusts (REITs).

  • Inflation Hedge: Real estate values and rents tend to keep pace with or outperform inflation.

  • Tax Benefits: Investors can take advantage of deductions, depreciation, and other tax incentives.

  • Cash Flow and Appreciation: Real estate can generate ongoing income and grow in value over time.

  • Passive Income: Building a portfolio can create steady, relatively passive earnings.

Disadvantages of Investing in Real Estate

  • Market Risks: Local economic changes can impact property values.

  • Maintenance Costs: Repairs and renovations require ongoing money and effort.

  • Illiquidity: Real estate cannot be quickly sold without potential loss.

  • Variable Expenses: Property taxes and operating costs can fluctuate.

  • Management Needs: Rental properties often require property managers and professional services.

Equity Build-Up and Pyramiding

  • Equity Build-Up: This is the increase in property value beyond your initial investment. Equity is “on paper” until you sell, refinance, or exchange the property.

  • Pyramiding: Using the equity from one property to finance another — either by selling or refinancing — allowing you to grow your portfolio.

Tax Benefits and Strategies

  • Capital Gains Exclusion:
    If you live in a home for at least 2 of the last 5 years, you can exclude up to $250,000 ($500,000 if married filing jointly) of capital gains when you sell.

  • Second Homes: Can qualify if used as a primary residence for at least every other year, with a 4-year holding period.

  • Installment Sale Deferral: Pay taxes gradually on sale proceeds, useful for sellers in lower tax brackets over time.

  • Depreciation:

    • Tax Depreciation: A theoretical loss in property value over time used for tax deductions. Land is not depreciable.

    • Economic Depreciation: Actual loss due to wear, damage, or market conditions.

  • Recovery Period:

    • Residential rental properties depreciate over 27.5 years.

    • Commercial properties depreciate over 39 years.

Section 1031 Exchange: Tax-Deferred Swaps

  • Sell an investment property and reinvest the proceeds into a “like-kind” property to defer capital gains taxes.

  • Requirements include use of a qualified intermediary, reinvestment of all proceeds, and meeting strict timelines.

  • This deferral acts like an interest-free loan from the government, allowing reinvestment of what would have been tax dollars.

Real Estate Syndicates, REITs, and REMICs

  • Syndicates: Groups of investors pooling resources, subject to SEC regulations.

  • REITs (Real Estate Investment Trusts):
    Companies owning income-producing real estate that allow investors to participate in large commercial properties via stock ownership.

    • Mortgage REITs: Invest in real estate debt.

    • Equity REITs: Own and operate properties.

  • REMICs (Real Estate Mortgage Investment Conduits):
    Entities that pool mortgages and issue securities, passing income through to investors.

If you’re considering real estate investing or want to learn how to leverage your current holdings, I’m here to help guide you through the process.

Katelyn Mayer
PA & MD REALTOR® | Iron Valley Real Estate of Central PA
Real Estate Agent | PA Bonded Notary Public
📧 katelynm359@gmail.com | 📱 717-446-1640
🏢 121 Towne Square Dr. Suite 203, Hershey, PA 17033

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